The Daily Telegraph

Bank is well equipped to weather a downturn so shares look cheap despite cloudy economic outlook

Buyback plan could combine with dividend to reward patient investors

- RUSS MOULD QUESTOR STOCK PICKS Russ Mould is investment director at AJ Bell, the stock broker.

Add a forecast £1.8bn dividend to a proposed £2bn share buyback and Lloyds Banking Group is, in effect, offering its shareholde­rs an 11pc cash yield on its £34bn market capitalisa­tion. That beats inflation, let alone government bonds, so patient investors are being paid to just sit and wait out any economic – or political – squalls.

And sit and wait is what they may have to do. As was the case with the full-year figures from Barclays and Natwest earlier in the month, investors looked past the solid results published by Lloyds last week and focused instead the bank’s cautious guidance for net interest margins this year. The suggestion by Charlie Nunn, the chief executive, they would exceed 3.05pc implied little or no progress on the 3.22pc recorded in the fourth quarter of 2022.

Management’s forecast of a 13pc return on tangible equity this year also undershot the consensus forecast, this time of 13.5pc, perhaps thanks in part to that guidance for the net interest margin, where the market had been looking for a further gain to 3.15pc.

This caution on returns from the £455bn loan book could reflect a view that the interest-rate cycle is about to peak and then see a return to cuts as the Bank of England responds to any signs of a recession. It could be the result of political pressure after the fury vented by the Commons Treasury select committee on the issue of banks’ profit margins earlier this month. It could be the result of competitio­n for loans and deposits between rival banks. And if could be an acknowledg­ement that savers and borrowers are both looking for help at a time when Lloyds has just racked up a record annual pre-tax profit.

Either way, Nunn’s suggestion that loan impairment­s will total around 0.30pc of the average loan book for this year is better than markets’ expectatio­n of 0.35pc, even if the so-called asset quality ratio and the cost of loan impairment­s is rising, from a low base.

The combinatio­n of the cloudy economic outlook and political (and public) pressure on the issue of loan book margins helps to explain why Lloyds’ shares look cheap.

The shares trade on barely seven times forward earnings and one times historic book value, despite the double-digit returns on equity, and how the planned buyback effectivel­y doubles the 5.5pc forward dividend yield for this year, so shareholde­rs can hunker down until a positive catalyst appears. A better-than-expected showing from the UK economy could be one potential source of that positive surprise, especially as Lloyds looks well equipped to weather any downturn, judging by how it

‘A betterthan­expected showing from the UK economy could be one potential source for a positive surprise’

comfortabl­y meets regulators’ capital requiremen­ts. In this column’s view, Lloyds still looks very cheap.

Update: S&U

Thank you – and apologies – to those eagle-eyed readers who spotted a typo in last week’s comment on specialist financing firm S&U. This column stated that two interim dividend payments worth a total of 73p implied the third and final dividend would be 50p against 57p a year ago, given the analysts’ consensus forecasts for the full year to January of 133p. Clearly that should have read 60p. All of the other numbers were correct and the investment thesis that Questor should stick with S&U was, mercifully, unaffected.

Update: Springfiel­d Properties

The combinatio­n of acquisitio­ns, the accompanyi­ng debt and then Scottish government policy on affordable homes means our analysis of Springfiel­d Properties has fallen rather flat.

The Aim-listed Scottish house builder’s interim results last week were solid enough, given the economic backdrop, but management chose to cancel the interim dividend to shore up the cash position. The shares crumbled to leave us with an evergrowin­g paper loss on the position we took last January.

Analysts still expect payment of a final dividend, and we can take some comfort from the strength of the company’s long-term competitiv­e position, its prime land bank and the lowly valuation: a market capitalisa­tion of £98m compares with tangible net assets of £138m.

As such, we shall simply have to sit and wait until the Scottish housing market shows signs of improved sentiment, the £117m net position (including leases and deferred payment for acquisitio­ns) starts to come down or – ideally – both.

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